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Monday, July 25, 2011

Dr. John Nye

Dr. John Nye

Who is Dr. John Nye? He was the valedictorian of President Noynoy Aquino’s Ateneo high school class of 1977. After high school, he went to California Institute of Technology and got an undergraduate degree in physics. He shifted to economics, however, and obtained a master’s degree and a doctorate in economics from Northwestern University.

Dr. Nye is currently the Frederic Bastiat Professor of Political Economy in George Mason University. He’s prominent in the field of new institutional economics and is an avowed disciple of Douglass North, a Nobel Prize winner in economic science, whom he brought into the country about four years ago, to give a series of lectures on institutional economics.

Dr. Nye’s father is Chinese, a successful businessman who had fled China when the communists took over. However, his mother is Filipina, a justice in the Court of Appeals.

After an absence of many years, but after he brought North to the country, he has been visiting the Philippines. One advantage of Dr. Nye as an analyst and observer of the Philippines is that he’s both an “outsider” and an” insider.” He’s far enough that he has an unjaundiced view, uncontaminated by the usual chatter among the elite, but close enough, because he’s after all a Filipino, having been born and raised here.

I’m writing about Dr. Nye because I think he has very important things to say about Philippine economic reforms. However, except to a few in the academic and international development agency community, his views are not well-known.

It’s also too bad that despite his school ties to President Aquino, the current government seems either ignorant of or indifferent to his sharp analysis and recommendations.

He’s also different in many ways from econometric-spouting, formula-wielding economists because his views are infused with political economy and real world observations of elites, coalitions, interests, and institutions.

Dr. Nye’s main point is that the government and the international development agencies don’t seem focused on what he calls “first order” economic reforms, addressing the main impediments to growth. Too often, he says, much effort is directed toward tax increases and achieving fiscal balance or emphasizing the need for infrastructure spending but without addressing major structural imbalances in the economy.

He believes the principal problem of the Philippines is its extreme dualism: a tiny manufacturing sector employing just about a quarter of the workforce and a vast agricultural and service sector employing the rest in low-productivity, low-wage jobs. Why is this a problem? According to Nye, this is an indication that major barriers exist in moving people out of the low-productivity agricultural sector to the more highly productive modern industrial sector. Indeed, the story of China is that of a vast number of the labor force moving out of agriculture and the countryside to the industrial sector in the cities.

What is preventing this necessary migration from low-productivity sectors to high-productivity sectors, a condition found in many growth stories? According to Nye, a combination of high minimum wages and strict employment protection in the industrial sector is preventing industry from absorbing more labor. The perverse effect of these labor market rigidities is that much of the workforce is stuck in low-wage, low-productivity, short-term jobs.

Citing labor economist Manny Esguerra, Nye says that the country has one of the highest minimum wages in the world. In 2007, the Philippines had the 28th highest minimum wage in the world at purchasing power parity (PPP) rates, and the 8th highest minimum wage out of a group of 30 developing economies.

According to Nye, one evidence of the perverse effect of a combination of high minimum wages and labor protection regulations in the industrial sector is that the unemployment rate among the college educated is far higher than the unemployment rate among those who have lower levels of educational attainment. Again citing Esguerra, he says the unemployment rate is 10.6% for the college-educated, compared to 8.6% for those who only completed high school, and 3.3% for those who just finished elementary.

In other words, the high unemployment rate among the college educated shows the high barriers to entry to the regulated industrial sector while the lower unemployment rate among the less educated shows lower barriers to entry in the unregulated, but low-productivity, agricultural, and services sectors.

Labor market rigidity is an important problem because growth happens when people move from lower productivity jobs to higher productivity jobs, but that’s not being allowed to happen.

Another perverse result is that the country’s skilled labor moves to other countries to get jobs, where they are “exploited” and benefit their host country.

Other high-minded, but misguided policies such as the prohibition of conversion from agricultural land to industrial use are also contributing to this problem, says Nye.

The movement from agriculture to industry is further hampered by policies like the CARP (Comprehensive Agrarian Reform Program), which keeps farms small, inefficient, and backward.

His Ateneo yearmate, President Aquino, whose principal program of government is fighting corruption, should take note, because according to Nye, “...limiting corruption without reforming a legal and regulatory system that encourages and supports a distorted economic system is both futile and is likely, even with partial success, to encourage longer-run dysfunctions by increasing the strain between what is demanded and what opportunities are being bypassed.”

On August 4, Dr. Nye will give a lecture, sponsored by Asia United Bank, on “Speeding Up Philippine Economic Growth: A Historical and Institutional Perspective.”

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FEF is a public advocacy organization dedicated to advancing the cause of economic and political liberty, good governance, secure and well-defined property rights, and market oriented reforms. It counts among its members former and present Cabinet secretaries and undersecretaries, leading figures in the academe, respected media personalities and opinion makers, and prominent members in the business and finance community.